Compliance

Regulatory investigations of auto finance companies are piling up as now reportedly the New York Department of Financial Services is joining the fray.

An online report citing an anonymous source indicated New York state’s financial services regulator subpoenaed the captive arms of Ford, Honda, Nissan and Volkswagen as well as Santander and TD Bank.

A person familiar with the matter told Reuters late on Thursday the developments are part of a probe of possible consumer abuses in subprime auto lending.

The report went on to note the investigation by the New York Department of Financial Services probe includes potentially discriminatory practices.

This latest development comes on the heels of the Consumer Financial Protection Bureau and the U.S. Department of Justice sending notification of potential penalties against the captive arms of Toyota and Honda. SubPrime Auto Finance News first reported about Toyota acknowledging in a filing with the Securities and Exchange Commission along with Honda sharing similar news a few days later.

Reuters’ report added the Department of Justice also is investng the auto finance processes at General Motors Financial.

This week’s reported actions by the New York Department of Financial Services isn’t the first time this state regulator turned its attention to the auto finance industry.

Back in May, DFS obtained a restraining order again Condor Capital Corp., a subprime auto lender headquartered on Long Island, and its owner, Stephen Baron. Officials said a DFS investigation uncovered that allegedly Condor has engaged in a longstanding scheme to steal millions of dollars from its customers — among other unfair, abusive, and deceptive practices.

Among the seven specific objections the American Financial Services Association made known to the Consumer Financial Protection Bureau, the organization concluded the threshold to determine what regulators consider to be a larger participant in auto financing should be raised significantly.

To recap, if a finance company makes, acquires or refinances 10,000 or more vehicle loans or leases in a year, the CFPB is looking to become that operation’s primary regulator stemming from a proposal disclosed during a bureau event back in September. This week, which was the end of the CFPB’s period for accepting public comment, the Structured Finance Industry Group joined AFSA in declaring the participation level should be lifted to 50,000.

“In order to avoid creating further regulatory burdens, uncertainty and potential restriction of access to credit for auto loans, the CFPB should make several changes to the proposed rule,” AFSA executive vice president Bill Himpler said in the comment letter to the CFPB that also was signed by Structured Finance Industry Group executive director Richard Johns.

“AFSA agrees with the bureau regarding the important role that automobiles and auto-related financing play in consumers’ lives, and in the country as a whole,” Himpler continued. “With this in mind, it is crucial that the CFPB exercise great care in crafting the final rule defining larger participants in the automobile financing market to avoid creating further regulatory burdens, minimize uncertainty for covered persons in that market, and potentially restrict consumers’ access to credit for these loans.”

Himpler then articulated the seven specific rule modifications for the CFPB to consider, including:

— Use the Regulation Z definition of “refinancing” as opposed to the proposed expanded definition.

— Retain the exclusion for asset-backed securities from the definition of “annual originations” and modify the exclusion to clearly cover asset-backed securities.

— Refrain from overreach regarding leases.

— Modify the test used to determine larger participants to ensure that it truly captures the “larger” participants who actually occupy the vast majority of the market.

— Change certain other definitions, including what is an automobile, a title loan and an affiliate.

— Provide additional detail on Experian Automotive’s AutoCount database and specifically exclude loans not made for the purpose of financing the purchase of automobiles or the refinancing of such original obligations from the database.

— Revisit the cost likely to be incurred by a larger participant experiencing supervisory activities by the bureau.

When Himpler elaborated about each of those seven recommendations, the AFSA officials shared some examples that might be of particular interest to finance company leaders. First, Himpler pointed out how the CFPB’s current metrics and definitions could place certain entities into two very different categories simultaneously.

“A threshold of 10,000, coupled with the overly broad definition of refinancing, is so low that covered persons who qualify as small businesses under the Small Business Administration’s definition could also qualify as larger participants under the proposed rule. If the definition of refinancing is not changed, even more small businesses have the potential to meet the definition of larger participant,” Himpler said.

“It seems contradictory that a covered person could be a small business and a larger participant at the same time,” he continued. “A small business that has less than $38.5 million in average annual receipts without question does not have more than 1 percent of the $900 billion automobile financing market share.

“It stretches credulity to conclude that such a small business with less than 1 percent of the market share should be considered a ‘larger’ participant in the entire market,” Himpler went on to say.

Himpler also touched on the CFPB’s expectations for what maintaining compliance is going to cost finance companies. The CFPB estimated total labor cost for an examination is about $27,611, requiring only a low-level compliance officer and a small fraction of an attorney’s fees.

However, Himpler said he reviewed CFPB statements and exam manuals. AFSA now believes the bureau expects a compliance officer that is a corporate executive with direct access to the finance company’s board.

“The salary for such a person would be much higher,” Himpler said. “Additionally, from what members of the industry have learned from their counterparts in other industries, a CFPB examination requires ‘all hands on board’ plus substantial outside counsel costs.”

Himpler mentioned several other resources finance companies might need, such as a number of in-house attorneys, business persons, IT professionals, outside counsel and outside consultants who could be directly involved with CFPB examinations.

So bottom line — how much might an examination cost?

“We believe, based on exam costs from companies in other industries, that a more accurate estimate for the cost of an examination would be $750,000 to $1 million,” Himpler said. “Larger and lengthier examinations can cost over $1 million in staff time and outside counsel and consultants.

“To be clear, this is independent of costs associated with the conclusion of memos of understanding or consent orders,” he continued. "The estimate in the proposed rule also totally ignores other costs, such as e-discovery, costs which are often astronomical.

“For a small business with $38.5 million or less in average annual receipts — even a half-a-million-dollar exam is a huge cost,” Himpler went on to say.

Reynolds and Reynolds and RouteOne reached a new agreement on Monday to integrate RouteOne’s eContracting system with Reynolds’ docuPAD software, which can provide dealerships with the capability to capture electronic signatures for vehicle financing eContracts directly from docuPAD workstations and send them to RouteOne.

Previously, the companies explained F&I managers switched between applications and technology to sign RouteOne contracts and other related documents. This new functionality between docuPAD and RouteOne can eliminate a cumbersome process and allow F&I managers to execute contracts and other ancillary funding documents in one place, integrated with the entire vehicle sales process in docuPAD.

“Signing RouteOne eContracts along with vehicle funding package documents on a docuPAD screen allows for a smoother eContracting process in the dealership’s F&I office,” said Jon Strawsburg, vice president of product planning at Reynolds.

“The new integration streamlines the electronic signature process and helps ensure better accuracy and compliance tracking,” Strawsburg continued. “It also will provide a more consistent experience for consumers and a more transparent interaction, both of which can lead to better customer satisfaction.”

Reynolds’ docuPAD is an interactive, flat screen F&I selling tool that can engage consumers and enable F&I managers to work more productively. docuPAD can offer touch screen features that range from personalized menus and video presentations to e-signature capture for contracts and disclosure documents. docuPAD is part of the Reynolds Retail Management System for dealerships and is protected by a number of U.S. patents.

RouteOne is a provider of automobile financing system solutions for dealerships and finance sources. Its eContracting solution can speed the funding process, reduces errors through automated contract data validation and improves the overall consumer experience. It is an integral part of the RouteOne platform that also includes credit applications, online retail services, compliance tools and open integration.

“We’re pleased to extend our relationship with Reynolds by integrating the RouteOne eContracting system with docuPAD, which will enable dealers to electronically transmit funding package documents from docuPAD to RouteOne, eliminating the need to fax them,” RouteOne chief executive officer Mike Jurecki said.

“RouteOne’s goal has always been to provide a seamless, complete solution to accommodate the F&I process for dealers and lenders, and the new integration with docuPAD helps both RouteOne and our customers move closer to that goal,” Jurecki went on to say.

For more than a year, the Consumer Financial Protection Bureau, an unelected government agency tasked with regulating the consumer finance market, has doggedly pursued what it views as “disparities” in auto lending. On this issue, you have to respect their determination: They’ve let nothing stand in their way, including lack of evidence.

It came as no surprise, then, when earlier this week the CFPB finally formally accused Honda and Toyota of discriminatory loan practices. Honda confirmed that the CFPB is seeking, “monetary relief and implementation of changes to our discretionary pricing practices and policies.” More automakers could be named in the coming weeks.

Both Toyota and Honda are working with the federal government to achieve a resolution. I imagine they will ultimately pay a fine and agree to refine portions of their pricing practices. Perhaps they will even be forced to switch to flat fees, thereby punishing well-qualified consumers by denying them access to lower rates. Automakers know, just like the rest of us, that when the United States government paints a target on your back, the best thing to do is cooperate. It’s just too bad that in this case the automakers already share the CFPB’s commitment to fair lending.

Auto lending in the U.S. is a fair and well-organized process. How do I know? Well, for one thing, I’m a dealer who writes thousands of loans every year to satisfied customers. For another, I’ve seen the recent study by the American Financial Services Association (AFSA) that found the CFPB’s approach to identify loan discrepancies was deeply flawed. For example, the methodology they used to classify loan applicants as African-American borrowers was correct just 24 percent of the time.

You can check out the full study here, and be amazed, like me, that the CFPB continues to push this argument despite their astounding lack of reliable data.

There are a number of ways the CFPB could make a difference in the lives of American consumers. One of the first would be to increase opportunities for, and access to, comprehensive financial education for all Americans. Unfortunately, instead they have chosen to focus on and unfairly attack a single industry, perhaps enjoying the chance to see themselves righting social injustice in the nation’s headlines.

And why let truth stand in the way of an opportunity like that?

Larry Kull is the AIADA (American International Automotive Dealers Association) chairman. See this post and more at the Chairman’s Blog.

Reynolds and Reynolds announced this week that Reynolds Document Services has partnered with the Chicago Automobile Trade Association (CATA) to launch the Reynolds LAW Illinois F&I Library, a comprehensive catalog of standardized, legally reviewed finance and insurance (F&I) documents that can be used by dealers who are CATA members.

The LAW Illinois F&I Library of documents was created and will be maintained by the combined expertise of Reynolds director of compliance and Used Car Week panelist Terry O’Loughlin, Reynolds’ AFIP certified compliance legal specialists and the CATA.

“We’re pleased to partner with CATA to offer a Reynolds LAW brand forms library to new car dealers throughout the Chicago area,” said Jerry Kirwan, senior vice president and general manager of Reynolds Document Services.

“The documents included in the LAW F&I Library are proven and trusted tools to help dealers meet compliance standards, improve business efficiency, lower risk and improve the car-buying experience for their customers,” Kirwan continued.

The Chicago Automobile Trade Association is one of the oldest and largest metropolitan franchised dealer associations in the U.S., listing more than 400 dealers as members.

“We’re continually looking for products and services that help new car dealers and their customers achieve a more efficient, effective and pleasing end-to-end automobile retailing experience,” CATA president Dave Sloan said.

“Working with Reynolds on the creation of a LAW Illinois forms library is one set of tools we can offer CATA member new car dealers to do just that,” Sloan added.

Reynolds Document Services offers similar LAW brand forms libraries to dealers in a number of states, including California, Ohio, Pennsylvania, Virginia and West Virginia.

The American Financial Services Association recently sent a letter to the Federal Communications Commission, again stressing what officials called the need for more sensible rules implementing the Telephone Consumer Protection Act (TCPA).

AFSA insisted that penalties of up to $1,500 per violation of the TCPA have provided plaintiffs’ attorneys with “fodder” for lawsuits that “enrich the attorneys rather than compensate their clients.”

Associated officials highlighted the letter supported a petition filed by the Consumer Bankers Association (CBA). CBA’s petition asks the FCC to clarify that “called party,” for the purposes of the TCPA, refers to the intended recipient of the call.

“By confirming that intended recipients are called parties, the FCC will not only stem the tide of frivolous TCPA litigation, but also will prevent potential chilling of beneficial consumer communication, shield consumers from higher costs stemming from increased litigation and allow small businesses to grow,” AFSA said.

Now, American Honda Finance revealed it also received the same allegations from these federal regulators.

In documents filed with the Securities and Exchange Commission on Tuesday, officials from the CFPB and DOJ sent a letter to Honda’s captive finance company saying they have authorized enforcement actions alleging discrimination in automobile loan pricing to certain borrowers by dealers and alleging the loan pricing disparities were caused by AHFC’s business practices related to dealers.

AHFC officials added that they also have been informed that the agencies may defer pursuit of this litigation if the captive “works with the agencies to seek a voluntary resolution to these allegations.

“The agencies have informed AHFC that they are seeking monetary relief and implementation of changes to AHFC’s pricing practices and policies, which changes could affect AHFC’s business,” the company said in its SEC filing signed by Paul Honda, the captive’s vice president and assistant secretary.

“AHFC intends to continue to cooperate with the agencies to find a mutually agreeable resolution,” Honda added.

Just like Toyota’s captive arm, American Honda Finance indicated that it was previously contacted by the CFPB and DOJ regarding the agencies’ review of pricing practices by dealers originating retail installment sale contracts for vehicles.

“Their request for information and the ongoing review was to determine if pricing practices of dealers originating retail installment sale contracts for automobiles resulted in discriminatory pricing of these loans to certain borrowers in violation of applicable laws,” Honda’s captive said. “AHFC has voluntarily provided the information requested to date and cooperated with the agencies’ investigation.”

And just like Toyota Motor Credit, American Honda Finance currently is one of the top 20 market share holders. According to third-quarter data from Experian Automotive, AHFC ranked No. 7, holding 2.54 percent of the market.

Furthermore, Honda is extremely active in the leasing market as Experian indicated three of the automakers models — the Civic, Accord and CRV — led the way in market share for the most new-vehicle leases in Q3.

Hudson Cook is keeping a watchful eye on a pair of developments regarding debt collections and the regulatory impact on finance companies.

The firm indicated the Consumer Financial Protection Bureau and the Federal Trade Commission filed several enforcement actions relating to debt collection and the notice of proposed rulemaking on debt collection practices is expected shortly. In light of those developments, Hudson Cook is hosting a free webinar to explain what the potential impact could be.

The Hudson Cook partners set to be a part of the hour-long webinar that’s scheduled for 1 p.m. ET on Dec. 15 are:

— Joel Winston, former associate director of the FTC’s division of financial practices

— Barbara Sinsley, who is considered one of the nation’s leading attorneys on debt sales and collection practices.

The panel will be moderated by Gary Becker, former chief executive officer and general counsel of DCM Services who now is a Hudson Cook partner

“Those attending the webinar will learn about the recent enforcement actions and projected rulemaking related to debt collection,” Hudson Cook said. “The panel of experts will provide insight into enforcement actions and their implications for the debt collection industry.”

An owner of an industry service provider as well as a veteran dealership manager recently achieved great success in examinations orchestrated by the Association of Finance & Insurance Professionals.

Joining the ranks of a handful of professionals who have advanced to the second round of AFIP’s Master Certification Program is Michael Tuno, founder and president of World Class Dealer Services (WCDS).

Tuno first attained master status two years ago when AFIP introduced the top-level curriculum in 2012.

“Compliance has always been at the core of WCDS products and services,” Tuno said. “Master certification helps me provide our dealer clients not only with a better understanding of the rules, but also best practices in the evolving regulatory environment.”

Tuno founded WCDS, based in Quakertown, Pa., in 2003. The full-service agency provides finance and insurance products and resources to automotive, recreational vehicle, powersport and heavy truck dealers in the mid-Atlantic region.

Before WCDS, Tuno gained 18 years of experience in F&I. He logged six years in retail sales, F&I and sales management; three years in automotive banking; nine years in sales and management with Universal Underwriters Group; and one year as vice president franchise sales with the Guardian Warranty Corp. before launching his own company.

Tuno has contributed to numerous trade publication articles and has been a speaker and panelist at national conventions. He was an instructor for F&I with the NADA Automobile Dealer Candidate Academy and currently serves as an instructor for F&I with the NADA American Truck Dealer Candidate Academy.

Tuno earned his initial AFIP certification in 1996 and his senior certification in 2009.

“Michael Tuno is a leader in the field of F&I,”, AFIP executive director David Robertson said. “It’s fitting that he’s in the first wave of second-tier masters – they are the vanguard of their profession. Their commitment to excellence and ethical conduct embody what it means to be a true professional.”

Gasman has 11 years of industry experience. He began apprenticing in F&I during his first job as a salesman with Fisher Chevrolet Honda Pontiac in Boulder. After a year, he was promoted to F&I manager and later moved up to the finance director position.

When the dealership transitioned in 2009 to Fisher Honda Kia, he served the organization as both finance director and Kia sales manager.

Gasman joined the McCaddon organization in January. The family-owned dealership, in operation since 1958, sells and services all makes and models of Cadillac, Buick and GMC vehicles.

The dalerships' president, Mark McCaddon said, “In today’s extreme regulatory and consumer-protective environment, the training and competency of F&I professionals is important to the entire operation. We are proud and delighted that Justin has reached the very highest level of proficiency in this position, and congratulate him for achieving master level status with the Association of Finance & Insurance Professionals.

“His willingness to train and test to this level is a benefit to our customers, the entire dealership organization — and to the industry as a whole,” McCaddon added.

Gasman became AFIP certified in 2006 and earned senior certification in 2008.

“AFIP certification reflects my commitment to my craft — and shows customers that we are doing business legally, ethically and professionally,” Gasman said.

And Robertson added, “Justin’s commitment to his profession and high level of execution truly embody the spirit of what it means to be a Master Certified Professional in Financial Services.”

At the same venue as Used Car Week, the National Automotive Finance Association awarded its Certified Consumer Credit Compliance Professional designation to its first graduating class following the completion of more than 24 hours of classroom training and 29 Web-based sessions.

The certification program was developed for the NAF Association by Hudson Cook and made possible by the financial support of the founding and sustaining sponsors.

The opening round of the program attracted students from banks and finance companies, dealers, device manufacturers and attorneys.

“We developed this challenging curriculum for those working in the auto finance industry to provide participants a valuable working knowledge of today's federal and state consumer financial services and compliance requirements, said Eric Johnson, Hudson Cook partner and co-curriculum developer and instructor.

“Those completing the program will be at the forefront of compliance preparation and training for themselves and the companies they represent,” Johnson continued.

Module 4 of the certification program was held in Las Vegas at the Red Rock Casino, Resort and Spa in conjunction with the SubPrime Forum.

The program's final module had 94 of the 141 enrolled program participants in attendance. Having completed this final stage of the program and all the required testing, the participants are now recognized as Certified Consumer Credit Compliance Professionals.

“The NAF Association has made a significant investment in this compliance program to assist the industry in facing the increasing regulatory requirements,” NAF Association executive director Jack Tracey said.

“The program was built to provide the best compliance education available,” Tracey continued.

Tracey went on to point out that Certified Consumer Credit Compliance Professionals become an important part of a company's compliance management system, demonstrating to regulators that a company's compliance staff has been able to meet the stringent requirements necessary to complete this program.

“The program offers great insight to the application of all consumer compliance regulations,” said program graduate Tony Myers of Regions Financial Corp.

The NAF Association is offering an opportunity to enroll in the program's next class which is being offered on Jan. 8 and 9 in Atlanta.